1. MACROECONOMICS 231

2. TOPIC #3 SUPPLY and DEMAND

3. Market Equilibrium Equilibrium in a market occurs when the price balances the plans of buyers and sellers. Equilibrium price is the price at which quantity demanded equals quantity supplied. Equilibrium quantity is the quantity bought and sold at the equilibrium price.

4. Market Equilibrium Price as a Regulator – If the price is too low, quantity demanded exceeds quantity supplied. – If the price is too high, quantity supplied exceeds quantity demanded.

5. Market Equilibrium Quantity Quantity Shortage(–) Price demanded supplied or surplus(+) (dollars per tape) (millions of tapes per week) 190 263 344 435 526

6. Market Equilibrium Quantity Quantity Shortage(–) Price demanded supplied or surplus(+) (dollars per tape) (millions of tapes per week) 190–9 263–3 344 0 435 +2 526 +4

7. Market Equilibrium 0246810 1 2 3 4 5 6 Quantity (millions of tapes per week) Price ( dollar per tape)

8. Market Equilibrium 0246810 1 2 3 4 5 6 Quantity (millions of tapes per week) Price ( dollar per tape) Demand for tapes

9. Market Equilibrium 0246810 1 2 3 4 5 6 Quantity (millions of tapes per week) Price ( dollar per tape) Supply of Tapes Demand for tapes

10. Market Equilibrium 0246810 1 2 3 4 5 6 Quantity (millions of tapes per week) Price ( dollar per tape) Supply of Tapes Demand for tapes Equilibrium

11. Market Equilibrium 0246810 1 2 3 4 5 6 Quantity (millions of tapes per week) Price ( dollar per tape) Supply of Tapes Surplus of 2 million tapes at $4 a tape Demand for tapes Equilibrium

12. Market Equilibrium 0246810 1 2 3 4 5 6 Quantity (millions of tapes per week) Price ( dollar per tape) Supply of Tapes Surplus of 2 million tapes at $4 a tape Shortage of 3 million tapes at $2 a tape Demand for tapes Equilibrium

13. Market Equilibrium Price Adjustments – A shortage forces the price up. – A surplus forces the price down. Such price changes are mutually beneficial to both buyers and sellers.

14. Predicting Changes in Price and Quantity A Change in Demand – What would happen to the price and quantity of tapes if the price of a Walkman falls from $200 to $50.

15. The Effects of a Change in Demand Quantity demanded Price (millions of tapes per week) (dollars Quantity supplied per tape ) Walkman $200 Walkman $50 (millions of tapes per week) 190 263 34 4 43 5 52 6

16. The Effects of a Change in Demand Quantity demanded Price (millions of tapes per week) (dollars Quantity supplied per tape ) Walkman $200 Walkman $50 (millions of tapes per week) 19130 26103 34 8 4 43 7 5 52 6 6

17. The Effects of a Change in Demand Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Supply of tapes Demand for tapes (Walkman $200)

18. The Effects of a Change in Demand Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Supply of tapes Demand for tapes (Walkman $200) Demand for tapes (Walkman $50)

19. The Effects of a Change in Demand Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Supply of tapes Demand for tapes (Walkman $200) Demand for tapes (Walkman $50)

20. A Change in Demand Prediction – When demand increases, both the price and quantity increase. – When demand decreases, both the price and quantity decrease.

21. Predicting Changes in Price and Quantity A Change in Supply – What would happen to the price and quantity of tapes if a new cost-saving production technology was developed?

22. The Effects of a Change in Supply Quantity supplied Price (millions of tapes per week) (dollars Quantity demanded old new per tape ) (millions of tapes per week) technology technology 1 90 2 63 3 4 4 4 35 5 26

23. The Effects of a Change in Supply Quantity supplied Price (millions of tapes per week) (dollars Quantity demanded old new per tape ) (millions of tapes per week) technology technology 1 90 3 2 63 6 3 4 4 8 4 35 10 5 26 12

24. The Effects of a Change in Supply Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Demand for tapes Supply of tapes (old technology)

25. The Effects of a Change in Supply Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Supply of tapes (old technology) Demand for tapes Supply of tapes (new technology)

26. The Effects of a Change in Supply Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Supply of tapes (old technology) Demand for tapes Supply of tapes (new technology)

27. A Change in Supply Prediction – When supply increases, the quantity increases and the price falls. – When supply decreases, the quantity decreases and the price rises

28. Predicting Changes in Price and Quantity A Change in Both Demand and Supply – What would happen if both demand and supply change together?

29. The Effects of an Increase in Both Demand and Supply Original Quantities New Quantities (millions of tapes per week) (millions of tapes per week) Price Quantity Quantity Quantity Quantity (dollars demanded supplied demanded supplied per tape ) Walkman old Walkman new $200 technology $50 technology 1 9 0 2 6 3 3 4 4 4 3 5 5 2 6

30. The Effects of an Increase in Both Demand and Supply Original Quantities New Quantities (millions of tapes per week) (millions of tapes per week) Price Quantity Quantity Quantity Quantity (dollars demanded supplied demanded supplied per tape ) Walkman old Walkman new $200 technology $50 technology 1 9 013 3 2 6 3 10 6 3 4 4 8 8 4 3 5 7 10 5 2 6 6 12

31. The Effects of an Increase in Both Demand and Supply Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Supply of tapes (old technology) Demand for tapes (Walkman $200 )

32. The Effects of an Increase in Both Demand and Supply Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Supply of tapes (old technology) Demand for tapes (Walkman $200 ) Demand for tapes (Walkman $50)

33. The Effects of an Increase in Both Demand and Supply Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Supply of tapes (old technology) Demand for tapes (Walkman $200) Demand for tapes (Walkman $50) Supply of tapes (new technology)

34. A Change in Both Demand and Supply Prediction – When both demand and supply increase, the quantity increases and the price decreases, or remains constant. – When both demand and supply decreases, the quantity decreases and the price increases, decreases, or remains constant.

35. The Effects of an Decrease in Demand and an Increase in Supply Original Quantities New Quantities (millions of tapes per week) (millions of tapes per week) Price Quantity Quantity Quantity Quantity (dollars demanded supplied demanded supplied per tape ) CD player old CD player new $400 technology $200 technology 1 13 0 2 10 3 3 8 4 4 7 5 5 6 6

36. The Effects of an Decrease in Demand and an Increase in Supply Original Quantities New Quantities (millions of tapes per week) (millions of tapes per week) Price Quantity Quantity Quantity Quantity (dollars demanded supplied demanded supplied per tape ) CD player old CD player new $400 technology $200 technology 1 13 0 9 3 2 10 3 6 6 3 8 4 4 8 4 7 5 3 10 5 6 6 2 12

37. The Effects of an Decrease in Demand and an Increase in Supply Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Supply of tapes (old technology) Demand for tapes (CD player $400 )

38. The Effects of an Decrease in Demand and an Increase in Supply Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Supply of tapes (old technology) Demand for tapes (CD player $400 ) Demand for tapes (CD player $400 )

39. The Effects of an Decrease in Demand and an Increase in Supply Quantity (millions of tapes per week) 0 2 4 6 8 10 12 14 1 2 3 4 5 6 Price ( dollar per tape) Supply of tapes (old technology) Demand for tapes (CD player $400 ) Demand for tapes (CD player $400 ) Supply of tapes (new technology)

40. The Effects of a Decrease in Demand and an Increase in Supply Prediction – When demand decreases and supply increases, the price falls and the quantity increases, decreases, or remains constant. – When demand increases and supply decreases, the price rises and the quantity increases, decreases, or remains constant.